On May 31, the Delaware Supreme Court, after an expedited appeal, affirmed the Court of Chancery's May 4 decision in Martin Marietta Materials v. Vulcan Materials, C.A. No. 7102 (Del. Ch.), enjoining plaintiff-counterclaim defendant Martin Marietta Materials from continuing to pursue its exchange offer and proxy contest to acquire defendant-counterclaim plaintiff Vulcan Materials. The Supreme Court issued its opinion, Martin Marietta Materials v. Vulcan Materials, No. 254 (Del.), explaining its judgment on July 10. For practitioners negotiating or enforcing nondisclosure agreements in sale transactions, this opinion provides useful guidance.
Martin Marietta Materials v. Vulcan Materials Dispute Background
The dispute arose from unsuccessful merger negotiations between Martin Marietta and Vulcan, the largest domestic participants in the aggregates industry. Since the early 2000s, Vulcan and Martin Marietta had occasionally discussed a possible business combination. After Ward Nye became CEO of Martin Marietta in 2010, Vulcan and Martin Marietta restarted merger talks, according to the opinion. Nye was receptive to a possible merger because the financial crisis had negatively affected Vulcan more than Martin Marietta and because Vulcan's CEO was approaching retirement age with no clear successor.
According to the court, Nye was concerned about being supplanted as CEO, which was more of a risk if there was a leak that Martin Marietta was in merger discussions with Vulcan and viewed as "in play" by potential acquirers. Martin Marietta had recently survived a hostile takeover attempt by a European company after initially friendly talks. When Nye first spoke to Vulcan's investment banker, he emphasized that Martin Marietta was not for sale and was only interested in a friendly merger, not a hostile takeover by Vulcan. Vulcan's CEO agreed. To secure this understanding, Martin Marietta and Vulcan negotiated executed two confidentiality agreements — a nondisclosure agreement and a joint defense agreement.
Drafting the NDA
In drafting the NDA, Martin Marietta's general counsel used an NDA from a prior transaction with Vulcan and enlarged the scope of restricted information and further limited the permissible uses and disclosures of protected information. The NDA provided that the parties could only use or disclose the other's nonpublic material for "evaluating a transaction." A transaction was defined as a possible business transaction between Martin Marietta and Vulcan. The NDA also barred the parties from disclosing that there were or had been any discussions of a transaction, if there was no agreed-upon transaction. The NDA allowed disclosure of evaluation material if disclosure was "legally required." Disclosure was legally required if there was an "external demand." Prior to making any disclosure pursuant to an external demand, the NDA required the disclosing party to give notice to the other party and a chance to comment on any disclosure. The parties entered into the JDA so they could share information about antitrust issues relating to the transaction. The confidentiality agreements did not contain standstill provisions.
A Suspected Breach of Confidentiality
As friendly merger talks sputtered in April 2011, Martin Marietta and its investment bankers began using Vulcan's confidential, nonpublic information to evaluate alternatives to a friendly deal, according to the opinion. Martin Marietta ultimately launched a hostile exchange offer for Vulcan in December 2011 and a proxy contest to elect four new members to Vulcan's board in January 2012. In SEC filings relating to the exchange offer and proxy contest, Martin Marietta disclosed information protected by the confidentiality agreements without complying with the notice provisions of those agreements.
After an expedited trial, the Court of Chancery held Martin Marietta breached the confidentiality agreements by impermissibly using and disclosing material protected by the agreements. The Court of Chancery enjoined Martin Marietta from proceeding with the exchange offer and proxy contest for four months. Martin Marietta appealed to the Delaware Supreme Court.
Initial Supreme Court Rulings
Before addressing Martin Marietta's claims of error, the Supreme Court rejected Martin Marietta's suggestion that the Court of Chancery had converted the confidentiality agreements into standstill agreements. The Supreme Court noted that standstill agreements and confidentiality agreements are different; a standstill agreement expressly prohibits parties from acquiring control of each other by certain means (typically a hostile bid and/or a proxy contest to replace directors) and does not require or depend upon a party using or disclosing the other party's nonpublic information. A confidentiality agreement, on the other hand, will not preclude a party from making a hostile bid for the other party, as long as the bid does not involve the use or disclosure of the other's party nonpublic information. The confidentiality agreements did not contain standstill provisions and were not standstill agreements. The Supreme Court recognized that the Court of Chancery understood the distinctions between the two types of agreements and did not transform the confidentiality agreements into standstill agreements as Martin Marietta claimed.
After resolving this argument, the Supreme Court affirmed the Court of Chancery's holding that Martin Marietta breached the JDA by using and disclosing confidential information. The Supreme Court agreed with the Court of Chancery that the JDA limited the use of confidential information to the transaction Martin Marietta and Vulcan were discussing — a negotiated merger — and did not extend to a hostile bid.
Next, the Supreme Court upheld the Court of Chancery's conclusion that Martin Marietta violated the unambiguous language of the NDA by disclosing nonpublic information, because there was no external demand triggering the "legally required" disclosure exception and because Martin Marietta failed to comply with the notice provisions of the NDA for disclosure. Finally, the Supreme Court upheld the injunction granted by the Court of Chancery.
The Final Supreme Court Verdict
The Supreme Court rejected Martin Marietta's claim that Vulcan had not established irreparable injury, noting that the parties had stipulated to irreparable harm in the event of breach in the confidentiality agreements and that Vulcan had offered evidence that it was "in play" at a bad time and that its employees and executive officers were distracted by Martin Marietta's actions. The Supreme Court also rejected Martin Marietta's attacks on the scope of the injunction. Martin Marietta claimed the four-month injunction was unreasonable because it would actually delay the proxy contest a year. As the Supreme Court and Court of Chancery recognized, however, Martin Marietta could not have disclosed information for a proxy contest until 2013 if it had complied with the NDA due to the NDA's May 3 expiration date and Vulcan's advance notice bylaw. Thus, the Supreme Court found the Court of Chancery did not abuse its discretion in granting a four-month injunction.
Key Takeaways From This Case
This decision highlights the importance of nondisclosure agreements and the way those agreements can affect a party's ability to respond to changing circumstances. Given the concerns of Martin Marietta and its CEO when they began negotiating a friendly deal with Vulcan, it made sense for them to negotiate and execute a strict nondisclosure agreement. This strict nondisclosure agreement became problematic for Martin Marietta, however, when friendly negotiations failed and Martin Marietta decided it wanted to pursue a hostile bid for Vulcan. Practitioners need to keep in mind the possibility of changing circumstances when negotiating nondisclosure agreements. A company that wants the maximum protection from being put in play, but also wants the flexibility to pursue a hostile transaction with minimal restrictions, may have to choose which goal is more important to it in negotiating a nondisclosure agreement.